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FX Markets Volatility Set to Rise with Busy Calendar: UK, US, & Canadian Inflation Due

FX Markets Volatility Set to Rise with Busy Calendar: UK, US, & Canadian Inflation Due

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- After a week in which you could count on one hand the number of 'high' importance events, the coming week's calendar is supersaturated with significant event risk.

- Beyond the calendar, the British Pound will be mainly driven by headlines about Brexit, as the US Dollar will continue to focus in on the progress of tax reform legislation.

- Retail trader positioning suggests a mixed environment for the US Dollar, one that is starting to turn negative.

Join me on Monday, November 13 at 7:30 EST/12:30 GMT for the FX Week Ahead webinar, where we discuss top event risk over the next week and strategies for trading FX markets around the events listed below.

11/14 Tuesday | 09:30 GMT | GBP Consumer Price Index (OCT)

The British Pound’s post-Brexit base effect weakness has worked its way out of markets, but its influence will linger at the upcoming inflation release, as anticipated by the Bank of England at their October policy meeting. Consensus forecasts are calling to see price pressures increase by +0.2% m/m (down from +0.3% in September) and +3.1% y/y (up from +3.0% in August). Likewise, Core CPI is expected to increase to +2.8% from +2.7% (y/y).

Unlike inflation reports in previous months, the upcoming data release doesn’t significant importance for the Sterling. Even as BOE policymakers have warned that headline CPI could stay over +3% through the middle of Q4’17, the October rate hike was a one-off event; it was not the beginning of a rate hike cycle. Inflation will need to persist above +3% through the end of 2017 and into early-2018 if rates markets are going to pull forward the timing of the next hike – currently pegged at November 2018.

Pairs to Watch: EUR/GBP, GBP/JPY, GBP/USD

11/14 Tuesday | 23:50 GMT | JPY Gross Domestic Product (Annualized) (3Q P)

The second look at the Q3’17 Japanese GDP report is expected to show the world’s third largest economy grew by +1.5% on an annualized basis, down from +2.5% produced in the first reading. Given that Japanese Prime Minister Shinzo Abe just received a fresh electoral mandate in election a few weeks ago, underperformance in Japanese growth could spur a fresh wave of speculation that new economic stimulus measures could be in the cards for 2018. We’ll need to see the Q4’17 Japanese GDP report before said speculation can be taken seriously, but that won’t be released until January.

Pairs to Watch: AUD/JPY, EUR/JPY, GBP/JPY, USD/JPY, Gold

11/15 Wednesday | 13:30 GMT | USD Advance Retail Sales & Consumer Price Index (OCT)

Consumption is the most important part of the US economy, generating nearly 70% of the headline GDP figure. The best monthly insight we have into consumption trends in the US might arguably be the Advance Retail Sales report. In October, according to a Bloomberg News survey, consumption was flat the headline Advance Retail Sales due unchanged from the previous month. The Retail Sales Control Group, the input used to calculate GDP, is due in at +0.3% from +0.4% (m/m).

According to a Bloomberg News survey, US consumer prices were marginally higher on a monthly-basis in October, due in at +0.1% from +0.5% (m/m) and +2.0% from +2.2% (y/y). The core readings should be similar, at +0.2% from +0.1% (m/m), and at +1.7% unch (y/y). These figures aggregately have started to steady near the Fed’s medium-term target, further confirming that the Fed will raise rates in December (Fed funds are pricing in a 100% chance of a 25-bps rate hike).

However, it is worth noting that if the core and headline year-over-year inflation figures underperform +2% in the two reports before the Fed meets in December, it’s possible that the hike is delayed – a scenario not being considered at all right now.

Pairs to Watch: EUR/USD, USD/JPY, DXY Index, Gold

11/16 Thursday | 00:30 GMT | AUD Employment Change & Unemployment Rate (OCT)

Australian employment increased by +18.8K in September after gaining+19.8K in August. Overall, the report for September was mixed, with full time employment only increasing by +6.1K over the period; the composition of jobs was mostly part time. Additionally, the unemployment rate dropped from 5.6% to 5.5%. The upcoming October jobs report is expected to be a carbon copy of the last one, with the Australian economy expected to have added +18.8K and the unemployment rate on hold at 5.5% last month.

Despite the steadily improving state of the labor market, uneven economic data appears to be a wrinkle in the outlook for the Reserve Bank of Australia, which once again made note that real wage growth aren’t strong enough to provoke a rate hike any time soon. Interest rate expectations (per overnight index swaps) still show August 2018 as the most likely period for the next rate hike, unchanged after the RBA’s meeting on November 7.

Pairs to Watch: AUD/JPY, AUD/NZD, AUD/USD

11/17 Friday | 13:30 GMT | CAD Consumer Price Index (OCT)

Canadian inflation is expected to dropped further below the central bank’s medium-term target of +2.0% in October, further dampening the dwindling likelihood of a third rate hike this year (overnight index swaps are only pricing in a 17% chance of a 25-bps hike by December, down from 82% in early-September). Recent comments made by Bank of Canada Governor Stephen Poloz suggested that its “premature” to have concern over low inflation figures, as “potential growth could be above trend” for a little while longer. Despite recent improvements in the labor market, figures from Statistics Canada showed that overall wage growth is at its lowest since 1990.

Pairs to Watch: CAD/JPY, USD/CAD, Crude Oil

Read more: US Dollar to Stay Focused on Tax Reform as Key Driver

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher, email him at cvecchio@dailyfx.com.

Follow him in the DailyFX Real Time News feed and Twitter at @CVecchioFX.

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